LONDON -- In the wake of 2009's 59% dividend "rebasing" and continual worries over its pension obligations, investors in BT (NYSE: BT) have had a torrid few years. The share price, for instance, fell from 340 pence or so prior to the recession to just 71 pence in March 2009.
But over the last year, BT has outperformed London's flagship FTSE 100 (INDEX: ^FTSE) by a hefty 15%, as investors have come to recognize that a series of remedial measures, put in place by chief executive Ian Livingston, have generally been delivering the goods.
And today's full-year results for the year ending March 31, 2012 show just how much progress has been made. To describe them as "sparkling" may be slightly over-egging the pudding, but not by much.
Looking good
Let's look at the numbers.
- Underlying revenue is down 2% to 19 billion pounds.
- Adjusted pre-tax profit is up 16% at 2.4 billion pounds.
- Free cash flow is up 13% at 299 million pounds.
- Net debt is up 266 million pounds -- but after making a 2 billion pound pension deficit payment.
- Adjusted EPS is up 13% at 23.7 pence.
- The full-year dividend is 8.3 pence, up 12%.
- The board expects dividends to grow by 10% to 15% per year for the next three years.
In addition, problem child BT Global Services is turning the corner, delivering solid EBITDA growth -- the company's overall EBITDA target of above 6 billion pounds has been delivered a year early. Furthermore, 10 million homes and businesses now have a fibre connection passing their door -- months ahead of schedule.
There's also the intention to buy back more shares -- some 300 million pounds' worth over the next 12 months, in fact.
Disappointment
There's no denying that those are decent results -- especially in what chief executive Ian Livingston describes as a "challenging environment." Take it away, Mr Livingston: "We have delivered another year of growth in profits and free cash flow. Our financial strength has allowed us to invest in the business, make a 2 billion pound payment into the pension fund, reward employees, and deliver double digit growth in shareholder returns."
Yet, as I write these words, BT's share price is down 2.5%. Why?
Gimme the divi
The answer, I suspect, lies in the market's perception that not only is BT not quite out of the woods yet, but that it's also being parsimonious with that dividend.
A declared full-year dividend in the range 8.5 pence to 8.9 pence had been widely expected, for instance. In the event, 8.3 pence seems a little miserly, especially with earnings per share growing faster than the declared dividend, reaching 23.7 pence. That equates to a dividend cover of 2.9, which seems high for a utility.
And while the City is expecting a dividend of 10.1 pence to 12 pence for 2013, the mid-point of BT's target range of 10% to 15% would only deliver a dividend of 9.3 pence. Heck, even the upper limit of that range only delivers 9.5 pence, well below expectations.
Foolish bottom line
Even so, by my calculations that mid-point dividend of 9.3 pence places BT on a forward yield of 4.4% on today's share price of 214 pence. That's very reasonable. What's more, the shares are rated on an undemanding price-to-earnings ratio of eight, again assuming mid-range EPS growth.
In short, for income investors, I reckon BT is a buy. I hold, and today's numbers may prompt me to buy more. The shares seem cheap, and the well-covered dividend would seem to have considerable upside.
He avoided techs in the dot-com bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor."
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